How to start investing in 2024: Quick-start guide for beginners

Keeping up with the news in 2024 can feel like riding a roller coaster at the county fair. The economy, housing market, and stock market are all uncertain. Despite media reports, now is the ideal time to take charge of your finances, establish an emergency fund, and begin saving for the future. Investing steadily over time, after building a strong financial base, is the key to long-term wealth accumulation. In short, the path to wealth isn't quick; it's steady and deliberate.

When Is the Right Time to Begin Investing?

Before delving into investing, it's crucial to navigate through the initial three steps of Ramsey’s 7 Baby Steps. This involves establishing a $1,000 emergency fund, clearing all non-mortgage debt using the debt snowball method, and building a fully funded emergency fund covering 3–6 months of expenses.

If you're unfamiliar with the 7 Baby Steps, it's a widely adopted plan aimed at achieving debt freedom and commencing wealth accumulation for retirement. Here's a breakdown:

Step 1: Save $1,000 as your starter emergency fund.
Step 2: Eliminate all debt (excluding the mortgage) using the debt snowball approach.
Step 3: Accumulate 3–6 months' worth of expenses in a fully funded emergency fund.
Step 4: Invest 15% of your household income into retirement savings.
Step 5: Allocate funds for your children's college education.
Step 6: Accelerate mortgage payments.
Step 7: Focus on wealth creation and philanthropy.

Your income is pivotal in wealth accumulation. However, being tied up in monthly debt obligations impedes wealth building. Therefore, concentrate on tackling Baby Steps 1–3 sequentially, dedicating focus and resources to one financial objective at a time. Upon reaching Baby Steps 4, 5, and 6, you can simultaneously invest in retirement, save for education, and pay off the mortgage, leveraging your freed-up income. This sets the stage for genuine wealth creation.

By establishing a debt-free foundation and accumulating substantial savings, you lay the groundwork for systematic wealth building. Remarkably, there exists a cohort of millionaires known as Baby Steps Millionaires who've achieved a seven-figure net worth by adhering to the 7 Baby Steps. On average, they became debt-free and reached a million-dollar net worth in approximately 20 years.

Beginning Your Investment Journey: A 6-Step Guide

Establish Your Investment Objectives

Similar to the importance of determining your motivations for following the 7 Baby Steps and achieving debt freedom, it's crucial to define your investment goals. Identifying your specific reasons for pursuing debt freedom provides a clear target to strive for on your path toward financial independence.

Determine Your Investment Amount

Now is the time to assess how much of your hard-earned income will be dedicated to generating returns. Your investment objectives will dictate the monthly contributions you make. For instance, upon reaching Baby Step 4, our recommendation is to allocate 15% of your household earnings to tax-advantaged retirement accounts (details on these options will be provided shortly).

Your personal savings rate significantly impacts your retirement nest egg, with studies highlighting its pivotal role in successful retirement planning. Consider this: consistently investing 15% of your income annually over 30 years (assuming an average 11% return rate) can lead to substantial wealth accumulation due to the power of compounding growth. With your income liberated from debt obligations, channeling 15% toward retirement becomes effortless. Simply automate this allocation from your paycheck, ensuring seamless contributions without any noticeable impact on your finances.

Familiarize Yourself with Investment Options

Before delving into investment endeavors, it's essential to pause and assess the array of options available—referred to as investing vehicles in financial terminology.

Various types of investing vehicles, such as IRAs or 529 college savings plans, cater to distinct investment objectives. Additionally, you'll encounter diverse investment instruments, including stocks, bonds, or mutual funds, tailored to suit specific goals within these accounts.

Explore the following common types of investment accounts designed for both long-term savings, such as retirement planning, and short-term savings, like accumulating funds for a home down payment. Evaluate which option aligns best with your financial objectives.

Planning for Retirement

Whether you're a freelancer, a small-business proprietor, or an employee with access to an employer-sponsored retirement plan, there are numerous investment accounts available to kick-start your retirement savings journey. Here's an overview of each type, but it's advisable to consult with a financial advisor for comprehensive guidance:

Traditional or Roth IRA

An individual retirement account (IRA) mirrors the tax advantages of a 401(k), with options for either tax-deductible contributions and tax-deferred growth (traditional IRA) or tax-free growth and withdrawals in retirement (Roth IRA). Unlike a 401(k), IRAs aren't sponsored by employers, granting investors broader investment choices.

Traditional or Roth 401(k) 

Employers often provide traditional or Roth 401(k) options as part of their benefits package. Both serve as retirement savings vehicles, distinguished primarily by their tax treatment.

• Traditional 401(k): Contributions are tax-deferred, providing immediate tax benefits but subjecting withdrawals to taxation in retirement.
• Roth 401(k): Contributions are taxed upfront, offering tax-free growth and withdrawals during retirement, excluding employer contributions.

SIMPLE IRA or SEP IRA

Small-business owners can utilize a SIMPLE IRA to save for retirement while facilitating employee contributions. For 2024, employees can contribute up to $16,000 annually (with an additional $3,500 catch-up provision for those aged 50 and above), typically accompanied by a mandatory employer match of up to 3%. A Simplified Employee Pension Plan (SEP IRA) presents another retirement option for self-employed individuals or small-business owners, offering comparable tax benefits to a traditional IRA. While both employers and employees can contribute to a SIMPLE IRA, only employers can contribute to SEP IRAs, with contributions capped at 25% of an employee's earnings or $69,000 for 2024, whichever is less.

Funding Education

Once you've allocated 15% of your income to retirement savings, consider initiating a college fund for your children. However, prioritize your retirement savings over this endeavor.

Explore the following investment avenues for college savings and their respective recommendations:

529 Savings Plan

A 529 plan, named after its section in the IRS code, is a state-managed, tax-advantaged account designed for educational expenses. Opt for a 529 savings plan over a prepaid plan due to its flexibility and absence of age restrictions. Notably, recent legislation like the SECURE 2.0 Act permits the transfer of unused funds from a 529 savings plan to a Roth IRA for the beneficiary under specific conditions.

Education Savings Account (ESA)

An ESA, also known as a Coverdell ESA, facilitates investment in education through trust or custodial accounts. Unlike 529 plans, ESAs impose a $2,000 annual contribution limit per child. Additionally, ESAs offer greater investment flexibility, allowing for various investment options such as stocks, bonds, and mutual funds.

Before selecting between an ESA and a 529 plan for college savings, seek guidance from a financial advisor to clarify inquiries regarding tax implications, rollover regulations, and eligibility criteria based on income and age for both the investor and the beneficiaries.

If you've started allocating 15% of your household income towards retirement and are exploring avenues for short-term savings, here are some top options:

Money Market Account (MMA)

A money market account (MMA) provides a low-risk, short-term saving option. Offering better interest rates compared to standard savings accounts, MMAs also ensure liquidity, allowing easy access to funds through checks or debit cards. However, MMAs typically come with limitations on monthly withdrawals (usually six), require higher minimum balances, and may impose account maintenance fees if minimum balances aren't maintained. MMAs are suitable for emergency funds or savings intended for use within five years, although their interest rates may not outpace inflation, making them unsuitable for long-term investment.

Index Funds

Index funds, a form of mutual funds, replicate market indices like the S&P 500 or Dow Jones Industrial Average. They offer relatively low risk and predictable returns. However, like any investment, the longer your money remains invested, the more potential for growth. Index funds are ideal for accumulating savings for goals such as a down payment or initial rental property investment, with a suggested minimum investment horizon of five years.

These are among the most prevalent investment and savings options, and the choice depends on your specific financial objectives and investment horizon. Consulting a financial advisor is always wise to address any queries before opening an account.

Let's discuss common investment options and why mutual funds are typically recommended for long-term investing.

Exchange-Traded Funds (ETFs)

ETFs resemble index funds, investing in stocks from specific indices but are traded like individual stocks. They offer passive investment options with potentially lower fees but require independent management. Consider investing in low turnover ETFs in taxable accounts after maximizing retirement contributions.

Bonds

Bonds represent loans between investors and borrowers, such as corporations or governments, promising repayment with interest. They are relatively easy to establish and carry lower risk but offer modest returns. While considered lower-risk compared to stocks due to their stability, bond values can decrease when interest rates rise, and their returns often marginally exceed inflation rates.

Mutual Funds

Mutual funds are optimal for long-term, consistent growth. They pool funds from multiple investors to purchase stocks across various companies. Actively managed by investment professionals, mutual funds offer a wide selection, allowing investors to choose funds with strong performance histories compared to others in their category.

Single Stocks

Stocks represent ownership shares in a company. Investing in single stocks involves concentrating all funds into one company, posing significant risk. Diversification is crucial, especially for novice investors. Single stock investments may be considered alongside mutual funds once advanced in financial planning, with a recommended portfolio allocation of no more than 10%.

Opt for an Investment Approach

As previously mentioned, investing in good growth stock mutual funds is recommended for achieving long-term, consistent growth. This strategy allows for diversification across various companies, reducing the risks associated with investing in single stocks.

Diversification, the principle of spreading investments across different assets, is crucial for mitigating risk, as it aligns with the adage, "Don't put all your eggs in one basket." Mutual funds effectively distribute investments across multiple sectors and companies.

To further diversify, investing in four types of mutual funds is suggested:

Growth and income funds (large-cap funds)

These funds invest in stable, established companies, offering stability and predictability.

Growth funds (mid-cap funds)

These funds target growing companies, presenting slightly higher risk but with potential for greater rewards.

Aggressive growth funds (small-cap funds)

These funds focus on smaller, high-potential companies, carrying higher risk and potential for higher returns.

International funds

These funds invest in foreign businesses, diversifying across global markets.

Contrary to the misconception that millionaires achieve wealth through high-risk investments, research by the Ramsey Solutions team, particularly The National Study of Millionaires, conducted with over 10,000 millionaires, indicates otherwise. Interestingly, a negligible percentage of millionaires cited single stocks as one of their top-three wealth-building tools.

Initiating an Investment Account

Upon reaching Baby Step 4, venturing into retirement investing becomes a priority. Here's a straightforward approach to kickstart your investment journey:

Begin with your employer's plan

Many workplaces offer a matching contribution when you invest in a retirement plan like a 401(k) or Roth 401(k). If a Roth option is available and you have access to reputable growth stock mutual funds, allocating your entire 15% towards this plan suffices. Otherwise, invest up to the match in your 401(k) and proceed to the next step.

Open a Roth IRA

The Roth IRA stands out as an exceptional retirement vehicle, allowing investment in top-tier mutual funds while offering tax-free growth upon retirement. Maximize contributions to a Roth IRA for yourself and your spouse if applicable.

Return to your employer's plan

If your Roth IRA is fully funded but you haven't reached the 15% goal, increase contributions to your 401(k) until the target is met.

Opening an account in your employer-sponsored retirement plan is a hassle-free process:

• Confirm eligibility with your HR department, noting that some companies permit enrollment immediately upon hiring, while others may require a one-year tenure.
• Complete any necessary paperwork and submit it to HR electronically or in person.
• Select your investment options.
• Arrange for automatic contributions.

Similarly, setting up a Roth IRA involves the following steps:

• Establish an account online with assistance from an investment professional.
• Fill out requisite paperwork.
• Choose your desired investments.
• Arrange automatic contributions.

An investment professional can aid in setting up accounts and selecting investments for other purposes, such as saving for your child's education. Once your mortgage is paid off, you can maximize contributions to tax-advantaged retirement accounts and even explore opening a taxable investment account for additional mutual funds, stocks, or ETF investments.

Partnering with a Professional to Begin Investing and Continuously Learn

The final step towards establishing a solid foundation for successful investing is to take action and start investing. Despite any economic fluctuations or sensationalized news about market conditions, it's essential not to be deterred. Instead, seek guidance from an investment expert who can provide genuine insights and support as you embark on your investment journey.

Undoubtedly, you'll have numerous inquiries along the way, such as "Which funds are the most suitable for me?" or "How do I effectively manage my 401(k) or set up a Roth IRA?" An investment professional can offer invaluable knowledge and address all your concerns, enabling you to make informed decisions regarding your retirement savings.

A competent investment professional will:

• Educate you about investment options, empowering you to remain in control of your investment decisions.
• Assist you in maintaining your investment strategy on course through regular consultations and evaluations.
• Prioritize your needs and interests with a client-centric approach.